It’s no secret that buying a house is part of the American dream. Homeownership allows you to build equity, enjoy predictable monthly payments, and benefit from tax deductions. Plus, thanks to various loan programs available, you can get pre-approved for a mortgage even if you don’t have a great credit score.
But what if you have a bankruptcy on your record? Can you really buy a home soon after your credit took such a major hit? Though every borrower’s situation is different, you can eventually purchase a home after bankruptcy.
Continue reading as we answer some questions related to this topic.
Is it hard to buy a house after bankruptcy?
A borrower with excellent credit and no bankruptcy will have an easier time getting a mortgage than a borrower with poor credit and a past bankruptcy. So ask yourself if it’s worth taking a few extra steps to achieve your homeownership goals. Trust us, while your patience might be tested on occasion, you will look forward to the day you finally move into your own home.
How long after a Chapter 7 can I buy a house?
If you’re reading this, there’s a good chance you’ve filed for Chapter 7 bankruptcy. It’s during Chapter 7 that the court wipes away one’s debt, leaving them with less than ideal credit.
You will need to wait at least four years after your bankruptcy is dismissed or discharged before qualifying for a mortgage. Not sure you can wait for that long? Then look into requirements for government-backed programs such as FHA, VA, and USDA loans. You may be able to obtain a mortgage with one of these loans in just a few years following the discharge or dismissal of your bankruptcy.
Related: Buying a home as a single parent
Can you buy a house after Chapter 7 with a co-signer?
Yes, having a co-signer can improve your chances of getting a mortgage after a bankruptcy. But it’s far from a sure thing. Since lenders typically use the lower credit rating of the co-signer and applicant, you could still be facing an uphill battle.
Let’s say you do find a mortgage lender who’s willing to proceed with your loan because you have a co-signer. In this case, it’s important that your friend or family member understands the risks involved with co-signing your application. This person is basically responsible for making loan payments if you default at any point.
Something else we should probably mention — a co-signer and a co-borrower are not the same.
Buying a house after Chapter 13 discharge
Credit experts will tell you that a Chapter 13 bankruptcy looks better than a Chapter 7. Whereas a Chapter 7 bankruptcy eliminates all qualifying debts, Chapter 13 often ends with the person making regular payments to their creditors. It’s also possible to keep your credit score intact after this type of bankruptcy.
Unfortunately, those who have been in this situation will have to hold off on their home buying aspirations. The court requires you to wait a minimum of four years from your dismissal date before you can apply for a mortgage. If your Chapter 13 was discharged, the “seasoning” period is four years from your filing date and two years from your dismissal date.
How to get a mortgage after bankruptcy
Here’s how to go about applying for your home loan.
Raise your credit score
Mortgage lending requirements are changing in large part due to the coronavirus (COVID-19). Folks who would’ve qualified for a loan just a few weeks ago are now running into trouble. This presents yet another obstacle for borrowers who went through bankruptcy.
Do your future self a favor and use this time to repair your credit. This means paying down high-interest debt (credit cards), becoming current with your bills, and disputing any errors on your credit report. The sooner you improve your credit score, the sooner you can acquire that coveted mortgage pre-approval letter.
Write a letter of explanation
Mortgage lending is pretty much black and white — you either meet the loan requirements or you don’t. That said, lenders are people too, and many understand the challenge of recovering from a bankruptcy personally.
So why not write a letter of explanation to your lender? It should include details on why you had to file for bankruptcy and what you’ve done to take charge of your finances. Believe it or not, this letter could be the difference between being approved and denied for a loan.
Get pre-approved
Homeownership is well within reach at this point! Once you’re pre-approved, you’ll know just how much house you can afford and have a leg up on other prospective buyers. Pro tip: Be sure to have essential documents handy, including recent bank statements, pay stubs, and W-2’s.
Start the conversation with a lender
Whether you’re hoping to buy a home in a few months or a few years, know that it’s worth the wait. This is especially true for those who have filed for bankruptcy in the past and may need to pause their home buying journey as a result.
Interested in learning more about qualifying for a home loan? Contact one of our dedicated mortgage consultants today.
FAQs
There is a two-year waiting period for an FHA loan application after you receive a Chapter 7 bankruptcy discharge. The two-year clock begins counting down on your discharge date. Use the next two years to improve your credit score, avoid late payments, save up extra cash, and improve your credit profile overall.
How long after Chapter 7 can I get an FHA loan? ›
There is a two-year waiting period for an FHA loan application after you receive a Chapter 7 bankruptcy discharge. The two-year clock begins counting down on your discharge date. Use the next two years to improve your credit score, avoid late payments, save up extra cash, and improve your credit profile overall.
How long after Chapter 7 can I get a home equity loan? ›
Lenders generally require a waiting period of between one and five years from discharge or dismissal — and up to seven following foreclosure — before they'll approve you for a home equity loan. This is because they want to be sure you've righted your finances and can manage new debt.
How soon after Chapter 13 can you get a loan? ›
When can I get a loan after a Chapter 13 discharge? You'll have to wait at least until all your debts have been repaid according to your Chapter 13 schedule, which will be either three or five years.
What happens to my mortgage after Chapter 7 discharge? ›
Absolutely. Chapter 7 bankruptcy clears mortgage debt, so your mortgage will be "discharged" or eliminated in Chapter 7, along with other qualified obligations.
How hard is it to get a home loan after Chapter 7? ›
Home Loans After Chapter 7 Discharge
Chapter 7 bankruptcy offers a clean slate by erasing qualifying debts, with an impact on credit reports for a decade. However, home buying isn't off-limits for that duration. Many individuals can pursue homeownership within 2-4 years, depending on the mortgage type.
What credit score is needed to buy a house with no money down? ›
A USDA loan is insured by the U.S. Department of Agriculture and is meant for low- to moderate-income home buyers. The USDA doesn't require a down payment and doesn't set a minimum credit score requirement, though most lenders will want borrowers to have at least a 640.
What disqualifies you from getting a home equity loan? ›
Most lenders require you to have at least 15% to 20% equity left in your home after factoring in the new loan amount. If your home's value has not appreciated enough or you haven't paid down a big enough chunk of your mortgage balance, you may not qualify for a loan due to inadequate equity levels.
Can I buy a house 2 years after Chapter 7? ›
The good news is that it's possible to purchase a home following a Chapter 7 or Chapter 13 bankruptcy. But there's usually a waiting period of 2-4 years before you can take out a mortgage.
How long can I stay in my home after filing Chapter 7? ›
Depending upon where you live, you may be able to remain in your home for six months or more after your Chapter 7 bankruptcy has been finalized. Once your bankruptcy is discharged, you will need to find another place to live.
The FHA allows a borrower to potentially be approved for a home loan during Chapter 13 bankruptcy provided the borrower has made timely, verified payments for at least one year although some financial institutions will require a total of two years after discharged before accepting a new home loan.
Can I qualify for a mortgage after Chapter 13? ›
If you're using an FHA, VA, or USDA loan, you can apply for a mortgage as soon as 1 year after filing for Chapter 13 bankruptcy, and there's no waiting period after being discharged. Conventional loans, however, will not approve you while in Chapter 13 and require a two-year waiting period after discharge.
Can I get a loan to pay off bankruptcies? ›
The law recognizes that people who are still in the repayment period of Chapter 13 bankruptcy may need to take out new loans. However, in most cases, you must get the court's permission to borrow money.
Can I walk away from my house after Chapter 7? ›
If you have not reaffirmed your mortgage, if you stop paying and walk away from the home, the foreclosure will not show up on your credit report. If it does, you have the legal right to dispute that charge and get it removed. If, however, you did reaffirm your mortgage, you are still responsible for the debt.
Can you strip a mortgage in a Chapter 7? ›
If you file for Chapter 7 bankruptcy, you cannot get rid of second mortgages, home equity lines of credit (HELOCs), or home equity loans. Filers in the Eleventh Circuit Court of Appeals, are no longer able to strip off (remove) these types of liens in Chapter 7 bankruptcy.
Will my credit score go up after Chapter 7 discharge? ›
A Chapter 7 bankruptcy will remain on your credit reports for up to 10 years. That's not to say your credit history can't improve after you've gone through those financial setbacks. Some people might find that their credit scores rise after their bankruptcy is discharged.
How soon can you apply for credit after filing Chapter 7? ›
A Chapter 7 bankruptcy takes approximately four to six months after the initial filing to be completed and your debts discharged. After that, you can apply for a credit card. A Chapter 13 bankruptcy, however, can take between three to five years as it's a restructuring of your debt that you pay off over time.
What can you not do after filing Chapter 7? ›
There are certain things you cannot do after filing for bankruptcy. For example, you can't discharge debts related to recent taxes, alimony, child support, and court orders. You may also not be allowed to keep certain assets, credit cards, or bank accounts, nor can you borrow money without court approval.
How long do you have to wait after a foreclosure to get a FHA loan? ›
To qualify for a loan that the Federal Housing Administration (FHA) insures, you typically must wait at least three years after a foreclosure. The three-year clock starts ticking when the foreclosure case has ended, usually from the date that the home's title transferred as a result of the foreclosure.
How long is credit affected by Chapter 7? ›
A Chapter 7 bankruptcy is typically removed from your credit report 10 years after the date you filed, and this is done automatically, so you don't have to initiate that removal.
